[sustran] WBCSD background - Economist article on industry challenges: #2

[ecoplan.adsl at wanadoo.fr]

>From The Economist, Sep 2nd 2004  

 

 

RIPE FOR REVOLUTION

 

New kinds of cars are about to produce a new kind of car industry

 

AMERICANS are queuing up to add a Prius, a new petrol-electric hybrid

car, to the trio of gas-guzzlers parked in the average suburban

driveway. There is no doubt about it: this car is cool. It is not only

fashionable in the usual way--the favourite model of Hollywood movie

stars--but also in a new and startling manner. The Prius serves not

only as a green credential for its owner, but also as an exciting

high-tech gizmo. Yet for anyone watching the fortunes of the car

industry closely, the Prius represents something else as well--the

quiet revolution that is about to engulf the car industry itself. 

 

Leading that revolution is Toyota, manufacturer of the Prius. It is no

accident that Toyota, Japan's biggest car firm, is now pioneering the

industry's move into new kinds of environmentally friendly vehicles

with a cleverly marketed and commercially viable product. Toyota is a

relentless competitor which has overtaken Ford in terms of sales and is

now tailgating the industry's leader, General Motors (GM). The

widespread use of all-electric, non-polluting vehicles, using hydrogen

fuel-cell systems (like GM's concept car above), is probably still 20

years away. The Prius, with its little electric motor performing as a

supplement to its petrol engine, is just a small step in that

direction. But it is significant, because it represents two things that

promise to transform the entire car industry--new technology and new

production methods. 

 

SO LAST CENTURY

The car business is ripe for revolution. As our survey of the industry

in this issue describes, it has chronic problems. Once it epitomised

20th-century capitalism, but today it looks poorly equipped to thrive

in the 21st century, or even to survive in its present form. Many of

the world's biggest car firms are destroying wealth rather than

creating it. About half of the industry is regularly incapable of

earning a decent return on its invested capital. Although it still

accounts for about a tenth of economic activity in rich countries, it

has been virtually shut out of stockmarkets for the past 20 years,

accounting for a mere 1% of total market capitalisation.

 

Only the support of governments and the patience of founding families

keep many companies going. Even this has often not made car making

profitable. For years companies such as General Motors and Ford have

relied on their finance arms to stay afloat. Laden with gold-plated

pension and health schemes from an earlier, more profitable age,

Detroit sometimes seems like a Swedish-style welfare state paid for by

a consumer-finance business specialising in cars. This is

unsustainable. Long-term liabilities are being met by repeated

financing via the corporate bond market, the only part of the capital

markets that most car companies can tap. 

 

But there are plenty of ideas knocking around for how the industry

might transform its fortunes. Ambitious mergers are no longer regarded

as the answer, especially after the disastrous acquisition of Chrysler

by Daimler-Benz in 1998. Instead, the focus is on ways to adapt the

mass production system invented by Henry Ford to the realities of

today's markets. All car firms have learned from Toyota how to use

just-in-time, lean production to make cars much more efficiently. A

continuous flow of parts arrives from the other side of the world

(increasingly from China) just when they are needed. But, oddly, the

finished cars then sit in parking lots for up to 90 days before they

are sold, usually at a discount because they are not the colour or do

not have the optional extras that the buyer wants. The whole industry

is straining to find ways of making cars to order rather than producing

them for inventory.

 

The industry is also trying to respond to changing tastes. As consumers

become more choosy, the market is fragmenting into a bewildering array

of niches. As a result, car manufacturers are struggling to make their

assembly lines flexible enough to produce, say, roadsters in the

morning and pick-ups in the afternoon. But as the market fragments,

flexibility alone may not be enough. Smaller production runs, smaller

factories and new ways of assembling cars are likely to be needed as

well. Henry Ford could one day be history, to borrow one of his own

famous put-downs. Economies of scale alone used to dictate the

industry's shape, but changing markets could be more conducive to

smaller, less capital-intensive companies.

 

Such changes are already lowering the barriers to entry to new

entrants. Some parts suppliers have taken over the role of final

assembly of niche models for big car firms, and others are doing more

of the development work on new cars. The virtual car company could be

in sight: perhaps one day some firms will own only technology, design

and a brand, while a contract-manufacturing industry, born of today's

suppliers, springs up, a path already taken by the consumer electronics

and computer industries. 

 

Also pushing the car industry in this direction is the fact that cars

themselves are evolving into something akin to consumer electronics

products, and this trend is likely to accelerate. Cars are already

lighter than they were, and they contain growing numbers of chips and

other electronic gear. Luxury models have features such as adaptive

cruise control that keeps drivers from hitting the car in front.

Electronic controls and little electric motors could soon be providing

steering and braking as well, much as they do in aircraft. As

electronics replaces clutches, steering boxes and other mechanical

features, cars will become still lighter.

 

THRILL ME

Those firms slow to innovate will surely exhaust even the patience of

protective governments and founding families, and so fade away. Those

that are successful at coping with the big technological, marketing and

financial changes beginning to sweep the car industry, as Toyota has so

far shown itself to be, should survive. But for the next few decades

they, too, will have to scramble to adapt. And the car industry's

privileged status as the pre-eminent example of the power of mass

production looks finished. The industry of the future will look more

like other consumer products businesses--crowded, fast-moving and a

slave to the whims of customers. 

 

 

See this article with graphics and related items at 

 

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